FRM Part I · FRM Exam Part I · Banks
Under the originate-to-distribute (OTD) model, a bank makes loans and then sells them, typically through securitization. Which of the following best describes the primary effect of this model on the originating bank's balance sheet?
The OTD model moves loans off the originator's balance sheet by selling them to a securitization vehicle. This releases regulatory capital and funding, allowing the bank to originate more loans. Holding loans to maturity and retaining all credit risk is the traditional originate-to-hold approach, not OTD.
- ALoans are moved off the bank's balance sheet, freeing regulatory capital and funding for new lendingCorrect
- BThe bank retains all credit risk but gains higher net interest margin
- CThe bank's deposits increase because investors place cash with the originator
- DThe bank's liquidity risk rises because loans are held longer to maturity
Explanation
In the OTD model loans are sold to a special purpose vehicle that issues securities. This removes the assets from the originator's balance sheet, releasing capital and funding for more lending. Retaining all credit risk and holding loans longer describe the traditional originate-to-hold model.
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